CHAPTER 5.01. Types of Mortgages

• Jurisdiction: United States

5.01. Types of Mortgages

[1] General

A mortgage is a grant to a lender or other obligee of real estate collateral to serve as security for the repayment of a debt or for the payment or performance of other obligations.¹ In Delaware, a mortgage serves as a lien and not a conveyance.² It is the grant of a security interest in real property. The effect of a mortgage is therefore to place a lien in favor of the mortgagee on the real property identified in the mortgage. A mortgage gives the mortgagee the right to foreclose.³ In other words, the mortgagee can bring appropriate legal action to have the real property collateral sold and the proceeds used to pay the mortgagee for the unpaid or unperformed obligations secured by the mortgage.

Real estate mortgages in Delaware are generally governed by Chapter 21 of Title 25 of the Delaware Code. Delaware does not authorize deeds of trust to secure a debt; however, it is possible that a Delaware court could construe a deed of trust to be a mortgage and enforce it as such.

Mortgages create a lien on real estate in Delaware from the time of recording and have lien priority according to the time of recording.⁴ Purchase money mortgages, construction loan mortgages, and mortgages to secure future advances of loan proceeds each have a special status as to priority.⁵

A mortgage can secure both liquidated and unliquidated obligations (e.g., an indemnity obligation).⁶ In addition to the stated indebtedness, a mortgage can secure other advances or disbursements recited in the mortgage provided the mortgage, or a loan agreement secured by the mortgage, states that it will secure these other advances or disbursements.⁷ Delaware law does not stipulate any limit on the agreement between an obligor and an obligee as to the time period for the repayment or performance of the obligations stipulated in the mortgage.⁸ However, there is a common law presumption of repayment 20 years after maturity of the loan.⁹

A mortgage also can secure an obligation to a third party.¹⁰ Or it may secure a performance of some condition.¹¹ However, the obligation must be a real payment or performance obligation.¹²

[2] Construction Mortgages

Construction lending can be a very specialized form of commercial real estate finance. The loans are outstanding only for the relatively brief period in which undeveloped land is turned into income-producing property and often for an additional brief period during which the project is to achieve rent stabilization. Because the value of the collateral and the means of loan repayment derive from the improvements to be made, much of the focus of a construction mortgage and associated loan documents addresses the process by which the lender advances funds for improvements, ensures that the funds are being properly applied to add value to the land, guaranties both the repayment and the improvement process itself (whether through completion guaranties, performance bonds, or both),¹³ and is repaid at maturity through a permanent loan financing by the borrower.¹⁴

One of the lender's principal concerns in making a construction loan is preserving the priority of the mortgage lien relative to mechanic's lien claims for work or materials for the construction project for which the construction loan is made. Generally speaking, a first mortgage to secure a construction loan will have priority over all mechanic's liens on the improvements under construction, provided that at least 50 percent of the proceeds of the construction loan secured by that first mortgage are used for the payment of labor or materials, or both, for those improvements.¹⁵

In some situations, the holder of a purchase money mortgage will subordinate that lien to the lien of a mortgage for a construction loan on that land. This happens frequently in purchases of large tracts of undeveloped land where development by the purchaser is done in phases. From the purchase money mortgagee's standpoint, the reason to subordinate in that instance is that the construction funding by the construction loan should add value to the land that is collateral for the purchase money loan. One concern of a purchase money mortgagee in this situation is the possibility that the construction lender does not properly advance those funds for construction that improves the land. For example, a construction lender might permit the borrower to use funds for acquiring personal property that does not become a fixture, or the construction lender might not diligently police the construction activity or draws, and it advances funds that the borrower applies to other projects or for uses unrelated to the collateral. A purchase money mortgagee whose position has arguably suffered as a result of such acts or omissions of the construction lender might assert claims against the construction lender. Purchase money mortgagees making such claims have endeavored to have the court alter the lien priorities and restore the purchase money mortgage to first position. Many...